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MarketScreener Homepage  >  Equities  >  Nyse  >  Inspire Medical Systems, Inc.    INSP

INSPIRE MEDICAL SYSTEMS, INC.

(INSP)
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INSPIRE MEDICAL : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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08/04/2020 | 05:16pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes to those statements included elsewhere in this Quarterly Report on
Form 10-Q, as well as the audited financial statements and the related notes
thereto, and the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Some of
the information contained in this discussion and analysis or set forth elsewhere
in this Quarterly Report on Form 10-Q, such as information with respect to our
plans and strategy for our business and the impact of the ongoing and global
COVID-19 pandemic on our business, financial results and financial condition on
our business, financial results and financial condition includes forward-looking
statements that involve risks and uncertainties. As a result of many important
factors, including those set forth in the "Risk Factors" sections of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 and this
Quarterly Report on Form 10-Q, our actual results could differ materially from
the results described in, or implied, by these forward-looking statements.

Overview

We are a medical technology company focused on the development and
commercialization of innovative and minimally invasive solutions for patients
with obstructive sleep apnea ("OSA"). Our proprietary Inspire system is the
first and only FDA-approved neurostimulation technology that provides a safe and
effective treatment for moderate to severe OSA. We have developed a novel,
closed-loop solution that continuously monitors a patient's breathing and
delivers mild hypoglossal nerve stimulation to maintain an open airway. Inspire
therapy is indicated for patients with moderate to severe OSA who do not have
significant central sleep apnea and do not have a complete concentric collapse
of the airway at the soft palate level. In addition, patients in the U.S. must
have been confirmed to fail or be unable to tolerate positive airway pressure
treatments, such as CPAP, and be 18 years of age or older, though there are no
similar requirements for patients in Europe.
We sell our Inspire system to hospitals and ambulatory surgery centers ("ASCs")
in the U.S. and in select countries in Europe through a direct sales
organization. Our direct sales force engages in sales efforts and promotional
activities focused on ear, nose and throat ("ENT") physicians and sleep centers.
In addition, we highlight our compelling clinical data and value proposition to
increase awareness and adoption amongst referring physicians. We build upon this
top-down approach with strong direct-to-patient marketing initiatives to create
awareness of the benefits of our Inspire system and drive demand through patient
empowerment. This outreach helps to educate thousands of patients on our Inspire
therapy and frequently results in patient leads.
Although our sales and marketing efforts are directed at patients and physicians
because they are the primary users of our technology, we consider the hospitals
and ASCs where the procedure is performed to be our customers, as they are the
purchasing agents of our Inspire system. Our customers are reimbursed the cost
required to treat each patient through various third-party payors, such as
commercial payors and government agencies. Our Inspire system is currently
reimbursed primarily on a per-patient prior authorization basis for patients
covered by commercial payors, on a case-by-case basis for patients covered by
Medicare, and under U.S. government contract for patients who are treated by the
Veterans Health Administration. As of August 4, 2020, we have secured positive
coverage policies with 56 U.S. commercial payors, including most large national
commercial insurers, covering approximately 182 million lives in the U.S. In
addition, all seven Medicare Administrative Contractors ("MACs") published final
policies in 2020 covering Inspire therapy. Each MAC also assigned a surgeon
reimbursement of approximately $450 for the procedure to implant the pressure
sensor (add-on CPT code +0466T). In June 2018, Japan'sMinistry of Health,
Labour and Welfare approved our Inspire therapy to treat moderate to severe OSA,
and we are currently seeking reimbursement coverage in Japan. For the six months
ended June 30, 2020, 90.2% of our revenue was derived in the U.S. and 9.8% was
derived in Europe. No single customer accounted for more than 10% of our revenue
during the six months ended June 30, 2020.
Our patient engagement efforts continue to include our refocused
direct-to-consumer marketing strategies, which, during the six months ended June
30, 2020, initially included a shift from radio and TV in our larger markets
that were affected by COVID-19 towards more digital and TV in smaller markets.
During the second quarter of 2020, we
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resumed radio and TV initiatives in our larger markets as the impact of COVID-19
lessened in those areas. Further, our team has leveraged virtual tools, such as
the new Inspire Sleep app released during the second quarter of 2020, and
telemedicine to continue physician training and patient education.
We rely on third-party suppliers to manufacture our Inspire system and its
components. Many of these suppliers are currently single source suppliers. We
seek to maintain higher levels of inventory to protect ourselves from supply
interruptions, and, as a result, we are subject to the risk of inventory
obsolescence and expiration, which could lead to inventory impairment charges.
In the U.S., our products are shipped directly to our customers on a purchase
order basis, primarily by a third-party vendor with a facility in Tennessee,
although we do ship some products from our facility in Minnesota. Warehousing
and shipping operations for our European customers are handled by a third-party
vendor with a facility located in the Netherlands. Customers do not have the
right to return non-defective product, nor do we place product on consignment.
Our sales representatives do not maintain trunk stock.
Since our inception in 2007, we have financed our operations primarily through
sales of our Inspire system, private placements of our convertible preferred
securities, amounts borrowed under our credit facility, the initial public
offering of our common stock that closed in May 2018 (our "IPO") and the
offerings of our common stock that closed in December 2018 and April 2020 (our
"follow-on offerings"). We have devoted significant resources to research and
development activities related to our Inspire system, including clinical and
regulatory initiatives to obtain marketing approval, and sales and marketing
activities. For the three months ended June 30, 2020, we generated revenue of
$12.2 million with a gross margin of 84.0% and had a net loss of $23.1 million
compared to revenue of $18.0 million with a gross margin of 82.8% and a net loss
of $7.7 million for the three months ended June 30, 2019. For the six months
ended June 30, 2020, we generated revenue of $33.5 million with a gross margin
of 84.3% and had a net loss of $39.3 million compared to revenue of $34.3
million with a gross margin of 82.6% and a net loss of $15.9 million for the six
months ended June 30, 2019. Our accumulated deficit as of June 30, 2020 was
$219.5 million.
We have invested heavily in product development. Our research and development
activities have been centered on driving continuous improvements to our Inspire
therapy. We have also made significant investments in clinical studies to
demonstrate the safety and efficacy of our Inspire therapy and to support
regulatory submissions. We also continue to make significant investments
building our sales and marketing organization by increasing the number of U.S.
sales representatives and continuing our direct-to-patient marketing efforts in
existing and new markets throughout the U.S. and in Europe. In the three months
ended June 30, 2020, we continued to train new U.S. medical centers and
activated 16 centers, and deactivated 15 then-existing centers that no longer
implant Inspire therapy, bringing the total to 328 U.S. medical centers
implanting Inspire therapy as of June 30, 2020. During the COVID-19 pandemic
business slowdown in the second quarter of 2020, we conducted a thorough review
of all centers and deactivated centers for reasons such as surgeons relocating
their implanting locations as well as where the location no longer implants
Inspire therapy. Additionally, we created nine new territories during the three
months ended June 30, 2020, bringing the total to 91 U.S. territories as of June
30, 2020. We continue to make investments in research and development efforts to
develop our next generation Inspire systems and support our future regulatory
submissions for expanded indications and for new markets such as Europe, Japan,
and Australia. For example, in April 2020, we received FDA approval for an
expanded age-range for Inspire therapy to include 18 to 21 year old patients.
Because of these and other factors, we expect to continue to incur net losses
for the next several years, and we expect to require substantial additional
funding, which may include future equity and debt financings.
On April 16, 2020, we completed a follow-on offering that included our offer and
sale of 2,300,000 shares of common stock at a public offering price of $58.00
per share. We received net proceeds of approximately $124.7 million after
deducting underwriting discounts and commissions and offering expenses.
Outlook
We expect the COVID-19 pandemic to continue to adversely impact our revenue due
to the significant decreases and delays in the number of Inspire therapy
procedures performed and patients screened for eligibility for Inspire therapy.
Beginning in the second week of March 2020, substantially all of the scheduled
Inspire therapy procedures were postponed and numerous other authorized cases
were unable to be scheduled. During April 2020, the widespread shutdown in
elective surgical procedures continued, with surgical volumes increasing in May
and even
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further in June, yet still remaining below pre-COVID-19 levels. The resurgence
of COVID-19 in various U.S. regions has, and will likely continue to, adversely
impact our procedure volumes. A portion of the second quarter 2020 procedures
performed were those rescheduled from March 2020, however, a backlog continues
to grow into the second half of 2020. Once the pandemic subsides, we anticipate
that there will be a substantial backlog of patients seeking appointments with
physicians and surgeries to be performed at hospitals and ambulatory surgery
centers relating to a variety of medical conditions and that patients seeking
Inspire therapy procedures may have to navigate limited provider, hospital and
ambulatory surgery center capacity.
In response to the spread of COVID-19 and in line with recommendations from
federal and local government and healthcare agencies, we transitioned employees,
except for those deemed essential to key aspects of our business, to a remote
work environment. Beginning in May 2020, our corporate office re-opened with
strict sanitation and physical distancing protocols, although many corporate
employees continue to work remotely as a heightened precautionary measure.
Additionally, our field staff continues to primarily work remotely and must
adhere to the respective hospital's and ambulatory surgery center's COVID-19
protocols when visiting centers. During the period during which surgical
procedures have been, and continue to be significantly limited, we identified
and implemented innovative solutions to support patients who have Inspire
therapy, as well as continuing to educate patients who may be struggling with
their sleep apnea. Patients continue to reach out to learn more about the
therapy and get connected to a healthcare provider, and we are supporting this
interaction through the use of several virtual tools, including the new Inspire
Sleep app, and telemedicine. We are also not expecting any material changes to
our headcount and are continuing with our planned expansion in recruiting
Territory Managers, though we have slightly reduced our hiring initiatives for
sales support roles.
To date, we have not experienced disruptions to our supply chain network as a
result of the COVID-19 pandemic. We have also not reduced our capital
expenditures and are continuing to invest in research and development, however,
we may determine to allocate resources differently due to impacts of the
COVID-19 pandemic.
Notwithstanding our expected reduced revenue, we believe that our existing cash
resources will be sufficient to meet our capital requirements and fund our
operations for at least the next 12 months. For additional information, see "-
Liquidity and Capital Resources."

Components of Our Results of Operations
Revenue
We derive primarily all of our revenue from the sale of our Inspire system to
hospitals and ambulatory surgery centers in the U.S. and select countries in
Europe. We recognize revenues from sales of our Inspire system when the customer
obtains control of the product, which occurs at a point in time, either upon
shipment of the product or receipt of the product, depending on shipment terms.
Our revenue has fluctuated, and may continue to fluctuate, from quarter to
quarter due to a variety of factors. For example, we have historically
experienced seasonality in our first and fourth quarters and have experienced
adverse impacts on our revenue due to the COVID-19 pandemic.
Revenue for the three and six months ended June 30, 2020 was negatively impacted
due to the global pandemic associated with COVID-19. Specifically, in March
2020, healthcare facilities and clinics began restricting access to their
clinicians, reducing patient consultations and treatments or temporarily closing
their facilities. As a result, beginning in the second week of March 2020,
substantially all of our then-scheduled Inspire therapy procedures were
postponed, and numerous other cases with prior authorization could not be
scheduled and were, therefore, also postponed. During April 2020, the widespread
shutdown in elective surgical procedures continued, with surgical volumes
increasing in May and even further in June, yet still remaining below
pre-COVID-19 levels. A portion of the second quarter 2020 procedures performed
were rescheduled from March 2020, however, a backlog continues to grow into the
second half of 2020.
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Cost of Goods Sold and Gross Margin
Cost of goods sold consists primarily of acquisition costs for the components of
the Inspire system, overhead costs, scrap, and inventory obsolescence, as well
as distribution-related expenses such as logistics and shipping costs, net of
costs charged to customers. The overhead costs include the cost of material
procurement, depreciation expense for production equipment, warranty replacement
costs, and operations supervision and management personnel, including employee
compensation, stock-based compensation, supplies, and travel. We expect cost of
goods sold to increase or decrease in absolute dollars primarily as, and to the
extent, our revenue grows or declines, respectively.
We calculate gross margin as gross profit divided by revenue. Our gross margin
has been and we expect it will continue to be affected by a variety of factors,
including manufacturing costs, the average selling price of our Inspire system,
the implementation of cost-reduction strategies, inventory obsolescence costs,
which generally occur when new generations of our Inspire system are introduced,
and to a lesser extent the sales mix between the U.S. and Europe as our average
selling price in the U.S. tends to be higher than in Europe. Our gross margin
may increase over the long term to the extent our production volumes increase
and we receive discounts on the costs charged by our contract manufacturers,
thereby reducing our per unit costs. However, our gross margin may fluctuate
from quarter to quarter due to seasonality.
Research and Development Expenses
Research and development expenses consist primarily of product development,
engineering, clinical studies to develop and support our products, regulatory
expenses, quality assurance, testing, consulting services and other costs
associated with the next generation versions of the Inspire system. These
expenses include employee compensation, including stock-based compensation,
supplies, materials, consulting, and travel expenses related to research and
development programs. Additionally, these expenses include clinical trial
management, payments to clinical investigators, data management and travel
expenses for our various clinical trials. We expect research and development
expenses to increase in the future as we develop next generation versions of our
Inspire system and continue to expand our clinical studies to secure positive
coverage policies from private commercial payors in the U.S. and enter into new
markets including additional European countries, Japan, and Australia. We expect
research and development expenses as a percentage of revenue to vary over time
depending on the level and timing of initiating new product development efforts
and new clinical development activities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation
for personnel, including base salaries, stock-based compensation expense and
commissions related to our sales organization, finance, information technology,
and human resource functions, as well as spending related to marketing, sales
operations, and training and reimbursement personnel. Other selling, general and
administrative expenses include training physicians, travel expenses,
advertising, direct-to-patient promotional programs, conferences, trade shows
and consulting services, professional services fees, audit fees, insurance costs
and general corporate expenses, including facilities-related expenses.
Other (Income) Expense, Net
Other (income) expense, net consists primarily of interest expense payable under
our credit facility and interest income.

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Results of Operations
                                                         Three Months Ended                                                                                                  Six Months Ended
                                                              June 30,                                                                                                           June 30,
                                   2020              2019             $ Change            % Change              2020               2019             $ Change            % Change
                                                                                        (in thousands, except percentages)
Revenue                        $  12,183$ 18,032$  (5,849)               (32.4) %       $  33,530$  34,282$    (752)                (2.2) %
Cost of goods sold                 1,954             3,094             (1,140)               (36.8) %           5,251              5,948               (697)               (11.7) %
Gross profit                      10,229            14,938             (4,709)               (31.5) %          28,279             28,334                (55)                (0.2) %
Gross margin                      84.0%              82.8%                                                     84.3%              82.6%
Operating expenses:
Research and development           6,062             2,846              3,216                113.0  %          11,500              5,449              6,051                111.0  %
Selling, general and
administrative                    26,981            20,268              6,713                 33.1  %          56,033             39,838             16,195                 40.7  %
Total operating expenses          33,043            23,114              9,929                 43.0  %          67,533             45,287             22,246                 49.1  %
Operating loss                   (22,814)           (8,176)           (14,638)               179.0  %         (39,254)           (16,953)           (22,301)               131.5  %
Other expense (income),
net                                  275              (526)               801               (152.3) %              80             (1,037)             1,117               (107.7) %
Net loss                       $ (23,089)$ (7,650)$ (15,439)               201.8  %       $ (39,334)$ (15,916)$ (23,418)               147.1  %



Comparison of the Three Months Ended June 30, 2020 and 2019
Revenue
Revenue decreased $5.8 million, or 32.4%, to $12.2 million for the three months
ended June 30, 2020 compared to $18.0 million for the three months ended June
30, 2019. The decrease was attributable to a $4.8 million decrease in sales of
our Inspire system in the U.S. and a decrease of $1.1 million in Europe,
primarily in Germany. Beginning in March 2020, our revenue growth in the U.S.
and Europe was impacted by the COVID-19 pandemic, which disrupted our ability to
access our clinician customers and their patients. Specifically, we saw
healthcare facilities and clinics restricting access to their clinicians,
reducing patient consultations and treatments, or closing temporarily due to
COVID-19. As a result, beginning in the second week of March 2020, substantially
all of our Inspire therapy procedures were postponed and numerous other cases,
which had received prior authorization, were not able to be scheduled and,
therefore were also postponed. During April 2020, the widespread shutdown in
elective surgical procedures continued, with surgical volumes increasing in May
and even further in June, yet still remaining below pre-COVID-19 levels.
Revenue information by region is summarized as follows:
                                                           Three Months Ended June 30,
                                                2020                                                              2019                                            Change
                                  Amount                % of Revenue             Amount              % of Revenue                $                 %
                                                                          (in thousands, except percentages)
United States                $     10,984                        90.2  %       $ 15,754                       87.4  %       $ (4,770)             (30.3) %
Europe                              1,199                         9.8  %          2,278                       12.6  %         (1,079)             (47.4) %
Total revenue                $     12,183                       100.0  %       $ 18,032                      100.0  %       $ (5,849)             (32.4) %


Revenue generated in the U.S. was $11.0 million for the three months ended June
30, 2020, a decrease of $4.8 million, or 30.3%, compared to the three months
ended June 30, 2019. The revenue decline in the U.S. was primarily due to
impacts from the COVID-19 pandemic.
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Revenue generated in Europe was $1.2 million in the three months ended June 30,
2020, a decrease of $1.1 million, or 47.4%, compared to the three months ended
June 30, 2019. The revenue decline in Europe was primarily due to impacts from
the COVID-19 pandemic.
Cost of Goods Sold and Gross Margin
Cost of goods sold decreased $1.1 million, or 36.8%, to $2.0 million for the
three months ended June 30, 2020 compared to $3.1 million for the three months
ended June 30, 2019. The decrease was primarily due to lower sales volume of our
Inspire system.
Gross margin increased to 84.0% for the three months ended June 30, 2020
compared to 82.8% for the three months ended June 30, 2019. Gross margin for the
three months ended June 30, 2020 was higher primarily due to manufacturing
efficiencies.
Research and Development Expenses
Research and development expenses increased $3.3 million, or 113.0%, to $6.1
million for the three months ended June 30, 2020 compared to $2.8 million for
the three months ended June 30, 2019. This change was primarily due to an
increase of $2.5 million for ongoing research and development costs, including
ongoing development of the next generation Inspire therapy system and
$0.6 million of compensation and employee-related expenses, mainly as a result
of increased headcount, and $0.2 million of regulatory submissions and clinical
studies expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.7 million, or 33.1%,
to $27.0 million for the three months ended June 30, 2020 compared to $20.3
million for the three months ended June 30, 2019. The primary driver of this
increase was an increase of $6.5 million in compensation, including salaries,
commissions, and stock-based compensation, and other employee-related expenses,
mainly as a result of increased headcount, offset by a decrease of $1.3 million
of travel expenses not incurred due to the COVID-19 pandemic. In addition,
marketing expenses increased $1.0 million, primarily consisting of
direct-to-patient initiatives, including TV advertisements which began airing in
the second half of 2019. During the three months ended June 30, 2020, we
continued to leverage virtual tools, including the new Inspire Sleep app
released in the second quarter of 2020, and telemedicine to continue physician
training and patient education. Other drivers of the increase to selling,
general and administrative expenses included an increase of $0.5 million due to
insurance costs, financial audit fees, consulting fees and information
technology supplies and equipment.
Other (Income) Expense, Net
Other (income) expense, net decreased by $0.8 million, or 152.3%, to $0.3
million of expense, net for the three months ended June 30, 2020 compared to
$0.5 million of income for the three months ended June 30, 2019. This change was
primarily due to a decrease in interest income of $0.8 million earned on our
cash, cash equivalents and investments balances due to lower interest rates.

Comparison of the Six Months Ended June 30, 2020 and 2019
Revenue
Revenue decreased $0.8 million, or 2.2%, to $33.5 million for the six months
ended June 30, 2020 compared to $34.3 million for the six months ended June 30,
2019. The net decrease was attributable to a decrease of $0.9 million in Europe,
primarily in Germany, partially offset by a $0.1 million increase in sales of
our Inspire system in the U.S. Beginning in March 2020, our revenue growth in
the U.S. and Europe was impacted by the COVID-19 pandemic, which disrupted our
ability to access our clinician customers and their patients. Specifically, we
saw healthcare facilities and clinics restricting access to their clinicians,
reducing patient consultations and treatments, or closing temporarily due to
COVID-19. As a result, beginning in the second week of March 2020, substantially
all of
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our Inspire therapy procedures were postponed and numerous other cases, which
had received prior authorization, were not able to be scheduled and, therefore
were also postponed. During April 2020, the widespread shutdown in elective
surgical procedures continued, with surgical volumes increasing in May and even
further in June, yet still remaining below pre-COVID-19 levels.
Revenue information by region is summarized as follows:
                                                              Six Months Ended June 30,
                                                  2020                                                              2019                                            Change
                                 Amount                    % of Revenue             Amount              % of Revenue               $                 %
                                                                           (in thousands, except percentages)
United States                $    30,258                            90.2  %       $ 30,109                       87.8  %       $   149                0.5  %
Europe                             3,272                             9.8  %          4,173                       12.2  %          (901)             (21.6) %
Total revenue                $    33,530                           100.0  %       $ 34,282                      100.0  %       $  (752)              (2.2) %


Revenue generated in the U.S. was $30.3 million for the six months ended June
30, 2020, an increase of $0.1 million, or 0.5%, compared to the six months ended
June 30, 2019. Revenue growth in the U.S. was due to increased market
penetration in existing territories, the expansion into new territories,
increased physician and patient awareness of our Inspire system, a greater
number of prior authorization approvals, additional positive coverage policies
and, to a lesser extent, an increase in our average selling price as a result of
the introduction of the new sensing lead on the Inspire system to the U.S.
market in February 2019. As noted above, U.S. revenue for the six months ended
June 30, 2020 was negatively impacted by the COVID-19 pandemic.
Revenue generated in Europe was $3.3 million in the six months ended June 30,
2020, a decrease of $0.9 million, or 21.6%, compared to the six months ended
June 30, 2019. The revenue decline in Europe was due to impacts from the
COVID-19 pandemic.
Cost of Goods Sold and Gross Margin
Cost of goods sold decreased $0.6 million, or 11.7%, to $5.3 million for the six
months ended June 30, 2020 compared to $5.9 million for the six months ended
June 30, 2019. The decrease was primarily due to lower sales volume of our
Inspire system.
Gross margin increased to 84.3% for the six months ended June 30, 2020 compared
to 82.6% for the six months ended June 30, 2019. Gross margin for the six months
ended June 30, 2020 was higher primarily due to manufacturing efficiencies.
Research and Development Expenses
Research and development expenses increased $6.1 million, or 111.0%, to $11.5
million for the six months ended June 30, 2020 compared to $5.4 million for the
six months ended June 30, 2019. This change was primarily due to an increase of
$4.6 million for ongoing research and development costs, including ongoing
development of the next generation Inspire therapy system, $1.3 million of
compensation and employee-related expenses, mainly as a result of increased
headcount, and $0.2 million of regulatory submissions and clinical studies
expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $16.2 million, or 40.7%,
to $56.0 million for the six months ended June 30, 2020 compared to $39.8
million for the six months ended June 30, 2019. The primary driver of this
increase was an increase of $12.1 million in compensation, including salaries,
commissions, and stock-based compensation, and other employee-related expenses,
mainly as a result of increased headcount, offset by a decrease of $1.1 million
of travel expenses not incurred due to the COVID-19 pandemic. In addition,
marketing expenses increased $4.2 million, primarily consisting of
direct-to-patient initiatives, including TV advertisements which began airing in
the second half of 2019. During the six months ended June 30, 2020, we initially
refocused
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our direct-to-consumer marketing strategies by shifting from radio and TV in our
larger markets that were affected by COVID-19 towards more digital and TV in
smaller markets. During the second quarter of 2020, we resumed radio and TV
initiatives in our larger markets as the impact of COVID-19 lessened in those
areas. Further, our team leveraged virtual tools, including the new Inspire
Sleep app released in the second quarter of 2020, and telemedicine to continue
physician training and patient education. Other drivers of the increase to
selling, general and administrative expenses included an increase of
$0.9 million due to insurance costs, financial audit fees, consulting fees and
information technology supplies and equipment.
Other (Income) Expense, Net
Other (income) expense, net decreased by $1.1 million, or 107.7%, to $0.1
million of expense, net for the six months ended June 30, 2020 compared to
$1.0 million of income for the six months ended June 30, 2019. This change was
primarily due to a decrease of $1.2 million in interest income due to lower
interest rates on our cash, cash equivalents and investments balances, partially
offset by a $0.1 million increase in unrealized gain on investments.

Seasonality

Historically, we have experienced seasonality in our first and fourth quarters,
and we expect this trend to continue. In the U.S., we have experienced, and may
in the future experience, higher sales in the fourth quarter as a result of
patients having paid their annual insurance deductibles in full, thereby
reducing their out-of-pocket costs. In the first quarter of each year in Europe,
we have experienced, and may in the future experience, reduced demand for our
Inspire therapy as Neue Untersuchungs-und-Behandlungsmethoden ("NUB") coverage
status is being determined and as hospitals are establishing their budgets
pertaining to allocation of funds to purchase our Inspire therapy.
Liquidity and Capital Resources
Our sources of capital have historically been from public and private sales of
our securities, sales of our Inspire system and borrowings under credit
facilities.
As of June 30, 2020, we had cash, cash equivalents and investments of $242.6
million and an accumulated deficit of $219.5 million, compared to cash, cash
equivalents and investments of $155.7 million and an accumulated deficit of
$180.2 million as of December 31, 2019.
On April 16, 2020, we completed a follow-on offering that included our offer and
sale of 2,300,000 shares of common stock at a public offering price of $58.00
per share. We received net proceeds of approximately $124.7 million after
deducting underwriting discounts and commissions and offering expenses.
The COVID-19 pandemic has negatively impacted the global economy, disrupted
global supply chains and created significant volatility and disruption of
financial markets. An extended period of global supply chain and economic
disruption could materially affect our business, results of operations, access
to sources of liquidity and financial condition. However, we believe that our
existing cash resources will be sufficient to meet our capital requirements and
fund our operations for at least the next 12 months. We may also seek liquidity
through additional securities offerings or through borrowings under a new credit
facility. We cannot assure investors that we will be able to obtain such
financing on commercially reasonable terms if at all.
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Cash Flows
The following table presents a summary of our cash flow for the periods
indicated:
                                                                  Six Months Ended
                                                                      June 30,
                                                                2020            2019
                                                                   (in thousands)
Net cash provided by (used in):
Operating activities                                        $ (40,026)$ (23,826)
Investing activities                                          101,160         (23,066)
Financing activities                                          127,232             875
Effect of exchange rate on cash                                    11       

(3)

Net increase (decrease) in cash and cash equivalents $ 188,377$ (46,020)



Operating Activities
The net cash used in operating activities was $40.0 million for the six months
ended June 30, 2020 and consisted of a net loss of $39.3 million, a decrease in
net operating assets of $7.3 million and an increase in non-cash charges of $6.6
million. The non-cash charges consisted of stock-based compensation, non-cash
lease expense, depreciation and amortization, stock issued for services
rendered, and accretion of the debt discount, offset by the non-cash income
related to the accretion of the investment discount, and other, net. Operating
assets includes inventories, which increased due to continued manufacturing of
systems inventory while sales decreased due to the COVID-19 pandemic, and
prepaid expenses and other current assets, which increased primarily due to the
prepayment of insurance premiums. Operating assets also include accounts
receivable which decreased due to decreased sales due to the COVID-19 pandemic
beginning in March 2020. Operating liabilities includes accrued expenses, which
decreased primarily due to the payment of accrued compensation as annual bonuses
were paid during the first quarter of 2020. Operating liabilities also includes
accounts payable, which increased generally due to the costs to support the
growth of our operations, including compensation and personnel-related costs.
The net cash used in operating activities was $23.8 million for the six months
ended June 30, 2019 and consisted of a net loss of $15.9 million, an increase in
net operating assets of $10.9 million and non-cash charges of $2.9 million. Net
operating assets consisted of prepaid expenses and other current assets,
accounts receivable, accrued expenses, inventories, and accounts payable to
support the growth of our operations. Non-cash charges consisted of stock-based
compensation, accretion of debt discount, non-cash lease expense, depreciation
and amortization, and stock issued for services rendered, offset by the non-cash
income related to the accretion of the investment discount and other, net. These
changes were generally driven by our increased revenues year-over-year, which
resulted in increases to accounts receivable, inventories, prepaid expenses and
other expenditures, including compensation and personnel-related costs.
Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2020
was $101.2 million and consisted primarily of proceeds from sales or maturities
of investments of $116.7 million, partially offset by purchases of investments
of $14.9 million and purchases of property and equipment of $0.6 million.
Net cash used in investing activities for the six months ended June 30, 2019 was
$23.1 million and consisted primarily of purchases of investments of $101.0
million, partially offset by proceeds from sales or maturities of investments of
$79.2 million. Purchases of property and equipment, net were $1.2 million.
Financing Activities
Net cash provided by financing activities was $127.2 million for the six months
ended June 30, 2020 and consisted primarily of $124.7 million in proceeds from
our follow-on offering in April 2020. Proceeds from the exercise of stock
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options of $1.5 million and proceeds from the issuance of common stock from our
ESPP of $1.1 million made up the remainder of the cash provided by financing
activities.
Net cash provided by financing activities was $0.9 million for the six months
ended June 30, 2019 and consisted of $0.8 million in proceeds from the exercise
of stock options and $0.6 million in proceeds from issuance of common stock from
the employee stock purchase plan, partially offset by a $0.5 million final
payment fee due upon the amendment of our credit facility.
Indebtedness
In August 2015, we entered into a loan and security agreement with Oxford
Finance LLC ("Oxford Finance"), as lender and collateral agent. The loan and
security agreement initially provided for a term A loan facility in the amount
of $15.5 million, which was fully funded on the closing date, and a term B loan
facility in an amount of at least $3.5 million but no more than $10.0 million,
to be available in the future subject to our achievement of certain revenue
milestones. We refer to our term A loan facility and our term loan B facility
together as our credit facility. In February 2017, we amended the loan and
security agreement to, among other things, increase borrowings under the term A
loan facility by $1.0 million, increase the minimum amount of the term B loan
facility to $5.0 million and reduce the maximum amount of the term B loan
facility to $9.0 million. As of June 30, 2020, we had $24.5 million of
outstanding borrowings under our credit facility. No borrowings remain available
under this credit facility.
In March 2019, we amended the loan and security agreement. Following such
amendment, outstanding borrowings under the credit facility bear interest at an
annual rate equal to the sum of (i) the greater of (A) the 30 day U.S. LIBOR
rate reported in The Wall Street Journal on the last business day of the month
that immediately precedes the month in which the interest will accrue or (B)
2.50%, plus (ii) 5.10%; provided, however, under no circumstances will the basic
rate be less than 7.60%. We are required to make monthly payments of interest
only through April 1, 2022. Following the interest-only period, we will be
required to make monthly payments of interest and principal in 24 consecutive
monthly installments. Outstanding borrowings under the credit facility mature on
March 1, 2024. On the maturity date, in addition to our regular monthly payments
of principal and accrued interest, we will be required to make a payment of
3.50% of the total amount borrowed under the credit facility, which we refer to
as the Final Payment, unless we have already made such payment in connection
with an acceleration or prepayment of borrowings under the credit facility.
Borrowings under the facility are pre-payable at our option in whole, but not in
part, together with all accrued and unpaid interest thereon and, if not
previously made, the Final Payment, subject to a prepayment fee of 2.0% if such
borrowings are prepaid prior to March 27, 2021 and 1.0% if such borrowings are
on or after March 27, 2021 and prior to maturity. We are also required to prepay
the amounts outstanding under the credit facility upon the occurrence of certain
customary events of default, as well as the occurrence of certain material
adverse events. The credit facility also includes certain customary affirmative
and negative covenants, but does not include any financial covenants. The credit
facility is secured by substantially all of our personal property other than our
intellectual property. We were in compliance with all covenants under the credit
facility as of June 30, 2020.

Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable
regulations of the SEC, that are reasonably likely to have a current or future
material effect on our financial condition, results of operations, liquidity,
capital expenditures or capital resources.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and
commitments from those described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2019.
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Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies and Estimates" in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2019. We have reviewed and
determined that those critical accounting policies and estimates remain our
critical accounting policies and estimates as of and for the three and six
months ended June 30, 2020. Other than the adoption of ASU 2016-13 described in
Note 2, no changes were made to our critical accounting policies during the
periods presented.
Recent Accounting Pronouncements
We have reviewed all recently issued standards and have determined that, other
than as disclosed in Note 2 and Note 4 to our unaudited financial statements
included elsewhere in this Quarterly Report on Form 10-Q, such standards will
not have a significant impact on our financial statements or do not otherwise
apply to our operations.

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